When Will the Mortgage Crisis End?

In 2008 we began to feel the consequences of an era of unbridled risk taking.  Loans had been made to Americans that could not possibly hope to repay their loans.  This particular component of the crisis is what people felt was most galling.  These sub-prime loans seemed so obviously dangerous that we couldn't believe that they had ever been made.  Unfortunately for us that was not the end of the story.

Is the Crisis Over?

Many are promoting the idea that we've hit the bottom.  Home prices have indeed flattened out somewhat.  In fact it may be fair to say that the majority of sub-prime loans have already peaked at their levels of distress.  Unfortunately those are not the only loans that will bring problems. 

While other kinds of loans may have been issued to more qualified candidates, they are not immune to crashing home prices and unemployment.  Even people who can afford to keep their house may be tempted to walk away when they owe more on the house than they can sell it for.  Meanwhile many of these qualified buyers are now dramatically less qualified and less inclined to want to keep their homes.  It seems likely that the outcome of this will be further waves of foreclosures, brought on by what were less risky loans.

When Will It End?

Usually when a bubble bursts, the asset price eventually returns to the trend-line.  In 2009 we likely still had 15% left to go to return to the trend-line, but sadly it's likely that we will overshoot.  A more accurate way to predict when the worst is behind us may have to do with mortgage vintages.  The older a mortgage it is, the less likely it is to default. 

One can easily foresee that we will likely see another round of foreclosures on homes due to ARMs and other loans, which will eventually bring another wave of foreclosures in the prime mortgage sector.  While this may not result in the huge declines in home prices we've seen thus far, it will likely continue to depress prices and prevent any chance of recovery. 

This doesn't even take into account the time bomb of Home Equity Lines of Credit (HELOCS).  Many people whose home value has been deteriorating, already owed nearly the entirety of it's worth in debt.  More terrifyingly, they took out these loans to buy depreciating assets like cars, assuming their house appreciation would cover the leverage they were incurring.

America is more indebted now than it has ever been and that debt is not shrinking.  While consumer debt is going down slowly, largely due to reduction of available credit, government and financial debt is increasing.  Combined with the downward pressure on asset prices, we are likely in for several more years of mortgage crisis.  We will not be out of the mortgage crisis until the prime loan default wave has crested and it is still beginning to rise.